Gold: Golden for the Wrong Reason

One of gold’s most prominent bulls, John Paulson, the asset manager who made more than $1 billion betting on the housing downturn, is tarnished.

Bloomberg reported that Paulson’s $900 million gold fund is down 26% through the beginning of March, after falling 25% last year. The fund has been hurt by the price of gold falling to around $1,600 off its all-time high of more than $1,900, which it hit in Sept. 2011. Paulson told clients that “his Gold Fund would beat his other strategies over five years because the metal was the best hedge against inflation and currency debasement as countries pump money into their economies.”

Paulson echoes comments from Ray Dalio, the man behind the $140 billion hedge fund Bridgewater Associates. Dalio told Barron’s in March 2011, “Currency devaluations are good for stocks, good for commodities, and good for gold.”

The price of gold has fallen off those highs and, so best we can tell, another economic crisis isn’t happening soon, meaning investors are less likely to flock toward the most prominent bearish investment. But gold’s effectiveness as just that — protection against the worst economic and financial distress — is also under attack.